Summary

  • Prior to the surge in geopolitical stress stemming from developments in the Middle East, the economic outlook appeared to be highly constructive. Growth momentum was showing signs of broadening out not just across regions but sectors as well, with business investment in technology on a material upswing and public infrastructure spending looking to pick up in the coming months, supplementing the ongoing resiliency of the consumer sectors.
  • The sharp increase in energy and other commodity prices in response to the war in Iran certainly has the potential to negatively impact growth and inflation that were otherwise trending in a positive direction — higher energy costs could filter broadly into the economy and put upward pressure on price levels; higher prices reduce purchasing power which, combined with increased general uncertainty, would result in demand destruction which constrains economic growth.
  • The impact, however, depends on how much prices escalate and how long they stay at elevated levels. The situation remains fluid, but there is potential for a relatively swift resolution that could reopen the Strait of Hormuz and likely drive a sharp reversal in commodity prices that would limit the overall economic impact and increase the likelihood that policymakers would be willing to look through a short-lived rise in inflation.
  • Of course, there is potential for the situation to persist and/or escalate — which would result in greater pressure on inflation and a bigger hit to growth. As it stands, however, this appears to be a lower-probability outcome given the limited appetite among other countries to get involved and the growing unpopularity of the incursion among American voters who will be heading to the polls for the midterms in November.
  • Undoubtedly, policy uncertainty and geopolitical risk are likely to remain elevated for the coming months, which suggest that markets will remain vulnerable to bouts of volatility, but as long as the underlying drivers of growth remain broadly intact — as the available dataflow suggests they have so far — the most likely scenario appears to be one in which financial markets that are now more reasonably valued regain their footing and continue to climb the wall of worry.

 

Download the full outlook